On this blog, we have frequently discussed the willfulness standard as it relates to one’s duty to satisfy offshore financial accounts and offshore income generating asset disclosure, tax and information reporting obligations set forth by the Internal Revenue Code (IRC) and the Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank Accounts (FBAR). Often, we discuss willfulness not only because of the possible criminal consequences that alleged voluntary or intentional behavior can carry but also because willful violations of one’s tax obligations can foreclose the possibility of utilizing the Streamlined Offshore Voluntary Disclosure Program to correct the error. If the taxpayer attempts to utilize the Streamlined Disclosure Program when it is inappropriate to do so, and his or her actions are viewed by the IRS as willful, he or she may have handed the government evidence that could be used in subsequent criminal tax enforcement proceedings. It is also necessary to make an affirmative statement under penalties of perjury that your actions were non willful and additionally your representative has to countersign which can lead to criminal exposure for the representative if he or she knows this to be a false statement.
Willfulness Standard Is Somewhat Amorphous and Maybe Tightened as Public Knowledge Regarding Offshore Duties Increases
On this blog, we frequently discuss that the willfulness standard is rather amorphous. Whether a taxpayer’s conduct can be considered willful is a subjective determination based on the intent of the taxpayer. Since it is impossible to actually get into a taxpayer’s head and know what he or she was thinking at the time, prosecutors look for outward signs of intent. These signs of intent are part of the overall facts and circumstances surrounding the alleged failure to disclose foreign accounts.
In 2015, we wrote about the IRS’s refusal to further define the term willful beyond the one line definition, “For purposes of the streamlined procedures, non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” There is a significant lack of clarity regarding this definition since it fails to further define the terms it utilizes and does not provide clear examples or factors to guide the determination.
At the present date and time, it is hard for the IRS to imagine anyone that has been using reputable tax preparers, especially CPAs or Tax Attorneys, to prepare their tax and foreign information returns, that fully informed their preparers on their offshore dealings, that could validly claim to be unaware of the FBAR and other offshore asset, business and income producing asset, tax reporting and information reporting requirements.
It is also extremely problematic at this point in time to argue that a reputable preparer did not meet their federal circular 230 due diligence responsibilities by failing to routinely inquire regarding foreign accounts and offshore income generating assets. Most Tax Attorney and CPAs routinely include written inquiries as to these issues in their engagement letters and in their organizers and especially during tax interviews. Therefore, it is an incredibly horrible idea to use your original preparer to go through an offshore voluntary disclosure whether the streamlined or full-blown version of the programs as they are government witness number one against you if the government decides to challenge your position as to willfulness. Just imagine how potentially damming your tax professional being forced to testify against you and answer questions like:
Did they ever tell you that they;
- Own income generating offshore real estate?
- Own an interest in an offshore businesses?
- Funded or become the beneficiary of an offshore trust?
- Received an offshore gift worth more than $100,000?
- Received an offshore inheritance worth more than $100,000?
- Received distributions form and offshore pension plan?
- Have investments in foreign brokerage accounts?
- Have Investments in foreign securities?
Did you ask them every year about offshore income generating assets and financial accounts?
- In your engagement letter?
- In your tax organizer?
Did you ever explain that U.S. taxpayers are taxable on their worldwide income?
Then why did you not file foreign information returns or pick up their taxable offshore income as taxable?
Over the past four years’ tax professional have been threatened with losing their right to practice in front of the IRS if they are not asking clients if they have offshore accounts and offshore income generating assets. If you choose to attempt a streamlined voluntary disclosure in the current political environment and you used a sophisticated tax preparer you risk the IRS approaching the preparer after receiving your streamlined disclosure and inquiring if you were made aware of your offshore tax and information responsibilities. Your preparer is not likely to put their licensing at risk to back up your non-willful assertion that is required for the streamlined program when faced with potential discipline themselves.
Recently, we wrote about an IRS official’s decision to finally provide additional information regarding the willfulness standard. In November 2016, IRS Small Business/Self-Employed Division special trial attorney and division counsel, John McDougal, indicated that most taxpayers should be able to qualify for the Streamlined Disclosure Program. He said that, “As long as you weren’t fraudulent or willful in the FBAR sense . . . even gross negligence is an appropriate basis for filing streamlined.” While this announcement seemed like good news for taxpayers with potential compliance issues, subsequent events seem to suggest a tremendously lowered standard for criminal & civil willfulness findings.
Recent California Tax Case Further Elucidates Willfulness Standard
In a recent California tax case, United States v. Bohanec, No. 2:15-cv-4347 (C.D. Cal. Dec. 8, 2016) there was an issue of what constitutes willfulness within the context of an FBAR duty. In Bohanec, the taxpayers were business owners who ran a camera store in California. The taxpayers apparently had several lucrative contracts with foreign camera companies and parts suppliers. From these contracts, the taxpayers deposited income into Swiss Bank accounts. They did not report these accounts, nor did they tell anyone about the accounts except for their children.
In 2010, they attempted to use the OVDP program to come clean regarding the unreported accounts. However, even when making this disclosure, the taxpayers failed to include certain offshore accounts. Thus, the taxpayers were rejected from OVDP. In a court proceeding, the judge found that, as sophisticated businesspeople, the taxpayers had engaged in reckless disregard of their tax and information reporting obligations.
The interesting takeaway from this case is that the defendants had argued that that “willfulness” included only intentional, meaning with knowledge, violations of known legal duties. Therefore, under the approach urged by the Bonehacs, a willfulness finding would have required not only knowledge of the obligation but also the specific intent to avoid it. However, the court found that within a civil context, willfulness does not require any knowledge on the behalf of the taxpayer. Rather, the court found that no knowledge or intent is necessary for willfulness. The fact that a taxpayer acted recklessly without knowledge in the context of his or her characteristics and circumstances is enough to support a finding of willfulness.
What Do These Events Tell Us About Willfulness?
The IRS has come a long way since 2015 when they refused to expound on what constituted willfulness for offshore disclosure purposes. However, it is not necessarily good news for taxpayers.
Following the comments made by Mr. McDougal and the court decision in Bonehac, we can now better define what it means to be willful. From the comments made by Mr. McDougal we can say that willfulness does not reach gross negligence. Therefore, taxpayers who were grossly negligent can theoretically qualify for Streamlined Offshore Disclosure. However, Bonehac stands for the fact that even behavior that does not intend to violate the law can, in the context of the existing circumstances, be characterized as a reckless disregard which does constitute willfulness. It is important to note that the taxpayers in Bonehacs were viewed as sophisticated businesspeople by the court. If they were found to be less sophisticated, it is highly likely the result would have differed.
Thus, willfulness continues to be subjective with its starting point falling somewhere on the continuum between gross negligence and reckless disregard. Since intent and specific knowledge are not necessarily required for a willfulness finding, any evidence of the foregoing will almost certainly result in a finding of willfulness. However, in the absence of intent, what makes up reckless disregard can only be assessed after considering the totality of the circumstances. These circumstances can include the party’s level of sophistication, whether they took steps to conceal the behavior, whether they hired an accountant, and whether events that would ordinarily lead to the taxpayer being aware of the obligation. As for the last point, consider the already changing circumstances regarding public awareness of FBAR and FATCA obligations. Whereas these obligations were little known even five years ago, today, the IRS seems to believe that most taxpayers know or should know about this obligation. Even where they do not their tax preparers are now seen as annually raising the issue of offshore income and information reporting religiously with every taxpayer to protect their right to practice and even to avoid malpractice suits by their own clients and preparer penalties.
2021 Willfulness Standard for Offshore Account Reporting
The definition of willfulness has further changed when it comes to offshore account reporting. As mentioned, reckless disregard was used as a standard to determine whether a defendant committed a violation of their foreign financial account reporting. Under U.S. v. Bohanec, a recent Ninth Circuit District Court case, it was clarified that the willfulness standard is not similar to those used in criminal cases. Instead, the standard is less than “clear and convincing evidence.” This would reduce the standard needed to prove that a defendant willfully violated foreign account reporting rules.
Additionally, whether a defendant made a willful violation could also be determined using the “conscious avoidance” standard. The Second Circuit case of United States v. Gatto provides guidance on how this doctrine is used. Specifically, the doctrine of conscious avoidance prohibits defendants from escaping liability for failure to report offshore accounts by sheltering themselves from key facts that would prove they committed a crime.
There are two factors that must be considered when using the conscious avoidance standard:
- Did the defendant have a subjective belief that there was a significant chance that a critical fact exists?
- Did the defendant then take purposeful steps to avoid learning of the key fact?
Essentially, if the defendant had access to knowledge that would show that they are required to report their offshore accounts, they cannot proceed to ignore this information. Doing so would result in the IRS finding that the taxpayer was willful in their effort to avoid reporting their offshore financial accounts. Our firm could help you mount a defense if you are a subject of offshore tax reporting case. We will stay up to date on the latest tax law developments to ensure that we could provide you with the legal representation you merit.
Work with a Tax Lawyer When Facing Offshore Tax Issues
Thus, while these recent developments provide some illustrations of what constitutes willful conduct, numerous open questions remain. However, as with any intent-based statute, one’s state of mind remains a difficult concept to define and prove. The dually licensed California Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing have deep experience in representing taxpayers in voluntary disclosures (Streamlined and Full Blown) to fix offshore tax and foreign information reporting issues. They work diligently and strategically to help you choose the proper offshore voluntary disclosure program to utilize to protect your liberty and net worth, and where appropriate, to show that your actions were not willful and that you did not intend to violate the tax and foreign information reporting laws. To schedule a reduced-rate consultation at our Los Angeles County, Westwood or Orange Country, Irvine law offices, call 800-681-1295 today.
See these pages for more information:
The Willfulness Standard when Failing to File FBARs
Does an FBAR Willful Penalty Automatically Make You Guilty of Fraudulent Failure to File Income Tax?
Taxpayers are Successful in FBAR Penalty Defense Case
